MENU

3 Reasons You Should Sell Penn West Petroleum Ltd. Shares

Accounting scandals, irregularities, or whatever you want to call them, along with poor strategies and management decisions have hurt other companies in the past, and now Penn West Petroleum Ltd. (TSX: PWE)(NYSE: PWT) is feeling the pain.

I recently wrote about Penn West as one of my 5 top dividend stocks under $30. However, I’ve lost confidence in this company because of what’s been revealed this week. Here are three reasons to consider ditching the stock.

Reason #1: Accounting scandal

Penn West announced this week that its board’s audit committee and independent advisors were examining Penn West’s reporting for 2014 and four preceding fiscal years. Consequently, this could delay the release of the company’s Q2 financial results.

What does this mean for investors? Penn West is reviewing its accounting practices for these years and will have to restate some of its historical financial reports. To me, regardless of what the company says, it’s inexcusable that these accounting irregularities are still an issue in 2014. Do companies not learn?

The takeaway: It’s all about investor confidence, whether these accounting irregularities are material or immaterial, and regardless of who is responsible. This issue is definitely a reason for investor confidence to wane.

Reason #2: Allegations

Everyone is innocent until proven guilty and that is all well and good, but it doesn’t diminish the fact that Penn West is confronting allegations of stock option manipulation.

The Globe and Mail reported that Penn West investor David Lester filed a lawsuit against the company and its present board, “alleging the price for past stock option grants were likely manipulated, whether through backdating, improper or unauthorized use of insider information or otherwise, according to court documents.”

The takeaway: Again, it’s all about investor confidence. No, nothing has been proven against Penn West and the company may emerge from this scot-free. Nevertheless, until the truth comes out and this issue is settled, it will be a cloud that hangs over the company and its stock.

Reason #3: Reduction of core development areas, staff, and dividends

Penn West has reduced its core development areas from up to eight down to three. These three are Cardium, Slave Point and Viking. In addition, the company has decreased its net wellbore count by roughly 3,500 wells, which is around 20% of total wellbores), via non-core dispositions.

In 2013, Penn West reduced its staff and in June 2013 cut its quarterly dividend to $0.14 from $0.27.

The takeaway: Until dividends are on the upswing again and all these other issues are resolved, I believe Penn West is not worthy of an investment. Normally, I look for the positives in any company I write about. However, companies have an obligation to shareholders and potential shareholders to not even give the appearance of impropriety.

Penn West may prove everyone wrong, then again, it may not. The onus is on it to repair its reputation, but I’m not waiting for it to do so. There are too many other companies out there I can invest in right now.

Give your portfolio a boost

Constructing a portfolio is like building a house, chief analyst Iain Butler says. You want to build it on a foundation of "rock solid, proven, long-term money makers." And do we have a winner for you... click here now for our FREE report and discover 1 top Canadian stock for 2014 and beyond!

Fool contributor Michael Ugulini has no position in any stocks mentioned.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.